Ask MoneyTalk: Should my teenager file a tax-return?

If your teenager has a part-time job, you may wonder if they need to file a tax return. Even if it’s only pocket change, there are some compelling reasons to begin your lifelong relationship with the Canada Revenue Agency.

BLAKE BURNS

WEALTH ADVISOR, TD WEALTH

This is a great question. One that can seem simple at first given that all individuals who earn income in Canada, no matter their age, should file a tax return. And even if you are only thinking about it now, this year’s tax deadline has been extended until June 1 due to the COVID-19 pandemic, giving you some extra time to file tax returns. However, there is more to consider.

The good news is that your teenager with a part-time job will not likely pay any personal income tax. There is a basic amount of income that taxpayers can earn tax-free every year. For 2020, the federal personal amount is $13,229.Unless your teen earned more than that, their earnings should not be subject to tax. In fact, iftheir employer withheld any taxes, they may be eligible for a refund.

But beyond getting a cheque in the mail, your teen can get a head start on growing their Registered Retirement Savings Plan(RRSP) contribution room. Thiscan be a good strategic move and quite useful down the road for tax efficiency. Each year they will be allocated a contribution amount equal to 18% of their income,as reported to the Canada Revenue Agency (CRA). Following a year or two of earning income under the basic personal amount, your teen may have earnedtwo or three thousand dollars of contribution room. In the years ahead, when they begin to work full-time and earn more money, they can utilize this cumulative RRSP room to lower the amount of earned income they will pay taxes on when they are in a higher tax bracket. Put another way, when they do contribute to their RRSPthey may get tax refunds in the future! Always a good thing.

Let’s keep that thought going: If theywere to then investtheir tax refunds back intotheir RRSP,that contributionwould also betax-deferred. This means that your teen’s contributions can grow within the RRSP account and theywill not have to pay tax on them until funds are withdrawn, which can be at retirement or before. With consideration for the latter, if your childchooses to purchase a first home, they can borrow up to $35,000 from their RRSPusing the Home Buyer’s Plan. Alternatively, the Lifelong Learning Planwould allow them to borrow from their RRSP to help pay for their education.Both programs would enable your child to borrow from their RRSP tax-free with the requirement that theyrecontributeaccording to the CRA’s repayment schedules.

More recently, the COVID-19 pandemic has highlighted the importance of filing a return.Some government benefits, including some of the emergency financial measures currently on offer, are based on income previously reported to the CRA. At the very least, when your teenager turns 19, they may be eligible for the GST/HST credit (they will be enrolled automatically in the programbased on their return from the previous year). Lastly, if applying for aloan or credit card, having a history of tax returns willhelp prove their income.

Tax preparation does not have to break a young person’s budget. There are a handful of ways to file for free that do not involve considerable fees or paperwork. The CRA keeps a list of free tax software thatis certified to work with its “NETFILE“ program for electronic filing. Additionally, there are also helpful free tax clinicsoffered through the CRA that will assist Canadians with lower incomes and less complex structures.

Bigger picture, the rules, regulations, and procedures corresponding to income tax can be complexand challenging to understand for those new to the process. As a parent, taking the time to educate your teenabout these points early on will help promote good financial habitsandcould produce a muchmore financially-savvy adult in time.

Blake Burns is from Calgary, AB, and entered into financial services 13 years ago. Blake regularly works with young people, and those new to Canada, helping to prepare them for the workplace. In his spare time, you will find him exploring the mountains on the back of a dirt bike, surfing, or engaged in some form of physical activity.

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DISCLAIMER: The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.TD Wealth represents the products and services offered by TD Waterhouse Canada Inc., TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).All trademarks are the property of their respective owners.® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.